The stock market will face another problem in August

The stock market will face another problem in August
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Stock market investors will soon face another challenge, in addition to the coronavirus pandemic and weak macroeconomic statistics. The problem seems to be quite typical for August.

Over the past 15 years, the VIX volatility index has grown in August by an average of 11.7%, which is significantly higher than the same value for any other month, writes Bloomberg. The second place in the rating of the most volatile months with a large lag is taken by May (+6.8%).

An increase in volatility usually means a deterioration in the stock market. Indeed, over the past 15 years, the S&P 500 index has declined by an average of 0.4% in August.

Past events do not guarantee the same development in the future, but there are definitely reasons for concern. The epidemiological situation in the US is getting worse, putting the economic recovery at risk, and the US Congress cannot yet move forward in discussing a new package of financial assistance, which is taking place just days before the expiration of “coronavirus” unemployment benefits.

Seasonal factors, as well as the cautious position of the FED, put the stock market in a vulnerable position, according to the investment Director of Guggenheim Partners ($270 billion under management) Scott Minerd.

In his Bloomberg TV interview, he notes that at this time of year, risky assets, especially stocks, are extremely vulnerable. The stock market can easily come under pressure and fall sharply, the expert says.

Today, the S&P 500 is almost 50% above March lows, from which it bounced back thanks to unprecedented monetary and fiscal stimulus.

At the peak of the stock market crisis, the VIX volatility index rose above 80, but it has spent the last weeks in the range of 25-35 points. Despite this, capital flows in some Exchange-Traded Funds (ETFs) reflect investor concerns. For example, UVXY (an ETF trying to reproduce the dynamics of the nearest VIX futures with a coefficient of 1.5) with assets of $1.2 billion has recorded capital inflows for five weeks in a row. During this period, it amounted to $871 million.

However, this year, the “curse of August” may not work, says Chief derivatives strategist of Susquehanna Financial Group (a global private finance company, specializing in derivatives trading, in particular, being the market maker at Cboe) Chris Murphy. He draws attention to the lower-than-usual realized volatility, as well as the reduced market turbulence that usually accompanies the corporate reporting season.

Low realized volatility and range trading may continue in the absence of serious market drivers and low investor activity, speculates the expert.

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